$3.8M Rev and $1.5M EBITDA "Old Economy" Owner Expecting $7.5M Price

June 12, 2021

by a searcher in Tampa, FL, USA

Call me crazy but I feel my spidey sense telling me to run from this one until the seller can come back to reality. As mentioned above, the target is an old economy, established business with a 2020 top line of $3.8M and $1.5M EBITDA (no COVID-19 impact from###-###-#### and he swears that the company is worth every penny of a $7.5M price tag if not more.

I have tried to communicate as clearly and nicely as possible that while he may whole-heartedly believe the company is worth 5x EBITDA, the market most likely has a very different opinion.

What are some talking points or some messaging that I can use to go back to the seller with to better set expectations?

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Reply by a searcher
from University of Western Ontario in Toronto, ON, Canada

Agreed with many of the comments above - continually coming back to the owner to try to convince them that their company isn't worth what the owner thinks it is, rarely (if ever) works. When I encounter an owner with high/unrealistic valuation requirements I would do 1 of 2 things: 1) bridge the gap with a very aggressive earnout structure (this creates a win-win scenario if the company can achieve high growth and margin expansion) or 2) start with an artificially low offer (lower than what you are willing to pay) and then increase your offer on the second go-around, thereby creating an anchoring effect on the low price but also making the owner think he's "won" the negotiation by you increasing your price.

At the end of day, if the gap is too big, then there is no point in you wasting your time but if you think you are a turn or two of EBITDA away, I believe there are ways to get there.

Reply by a searcher
from Babson College in Cambridge, MA, USA

Agreeing with a lot of the comments here already - the multiple may or may not be fair, but they're the seller so they may not be incentivized to budge. If you can make the number work on your side (with negotiation, of course) by breaking the offer up into multiple segments, that might be the way to go - keep owner on as employee (salary) for some time, performance bonus if the numbers continue to work over years 2-4, a portion as stock/ownership in the co. moving forward..

Sometimes all the seller cares about is the upfront number, not the details, if many of the success stories on here can teach us something!

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